On-Demand: Benchmarking and Compensation Setting--What You Need to Know
June 25, 2020
During this webinar, our panelists discussed benchmarking and compensation setting for nonprofits, and reviewed the key focus areas of the Form 990.
Bill Epstein:Hi, everybody. My name is Bill Epstein. I'm also a partner in the not-for-profits services group, and I've been with EisnerAmper since about 2001, also serving solely in the not-for-profit industry. Mary.
Mary Rizzuti:Good afternoon. My name's Mary Rizzuti and I'm the managing director of Compensation Resources. We combined with EisnerAmper in March and have continued our consulting work under their brands. I'm very excited to be part of their brands and family. I've worked with CRI for over 23 years, providing a wide array of services to clients at the executive level and the staff level. About 43% of our business is in the not-for-profit space. So I'm excited to share the knowledge that I've gained through the course of my work and look forward to engaging with you this afternoon. Thank you.
Candice Meth:We have a full agenda today talking about benchmarking and compensation setting. But I would certainly be remiss if I did not point out the unintended irony of the sample organization you will see today called Hugs Inc. I had created a sample entity for educational purposes earlier this year. But in a time of social distancing, the irony of this mock entity's mission, it's certainly not lost on that. With that, as a segue, I'll turn it over to Bill.
Bill Epstein:Thank you, Candice. Yeah. Actually, when we look at the organization, I will point out some things about the Hugs Inc. So my section actually is going to be talking about the 990 and certain areas within the 990 that we can use for analysis and benchmarking tools. So the 990 actually is a significantly large document, and it's called the tax return. But really, what it is, is an informational return. So the 990 really tells the story, an organization story through a federal required filing with a significant amount of transparency. So organizations can use the 990 to fulfill its responsibilities with the internal revenue service, and they can also use it as a marketing tool.
So an easy way to market to potential donors, grantors, funders, and what a better way to advertise to those people, but through free advertising through a federal file. But the form 990 is also a document that's available for public inspection. So this document can also be used by watchdog agents, agencies, and rating agencies that Candice is going to discuss later. It can be used by the press, and it can also be used by other similar sized and structured organizations wishing to compare themselves to another organization.
So we're going to get into a little bit about what's in general interest to a lot of users. But some of the big ticket items are governance and how the organization's organized, who's on the board, are those board members independent, do they have conflicts, what policies and procedures are listed, what kind of things that the organization does relating to best practices, compliance laws, and just in general, how it handles its affairs.
Now, we're going to look at compensation. This is probably where most users go first because it's typically the juiciest part of the entire form. For those who are lifted on that form, the most revealing part, nothing like being put out there for everyone to see. We're also going to take a look at how the organization details its expenses and utilizing its resources to accomplish its mission. We're going to take a look at really related party transactions with other entities, board members, employees. Some organizations are actually operating far from home and have a lot of foreign activity.
So one of the things we're going to look at is where organizations are operating internationally and what they're doing internationally, if you're programming a grant, is it investments? Then we'll take a look at special events, fundraising use of professional fundraisers, sprint, things like how many events organizations having, are they successful? If they're using professional fundraiser, they're using, how much are they paying? How much money are they actually generating? That's actually a big one that a lot of people ask about.
So I'm going to switch to the next slide. Here we see a page one of the 990. So basically what this is, this is page one of the core form of the 990. It's in a snapshot of the entire core form of the broader amount of information contained as well, the information from the supplemental forms. So I could literally spend my entire lot of time talking about this page in particular, but I will definitely spare you that torture. So this particular page is broken down into a few key components.
So in the middle of the page there, you see some in the organization. This is where an organization would provide some detail about its programs. Briefly, there's additional detailed information in part two to this form, which we won't show. Then just so everyone knows, I may be referencing Schedule O in this presentation and Schedule O, which is the catch-all just so everyone understands, that Schedule O is supplemental schedule to the core form 990. So I have to say schedule O, which is where the pieces of information that don't fit on the core form would then be completed there.
So what we see here is that this particular organization in addition to providing educational programs relating to public hugging, it's actually a grant-making organization, and it's actually functioning both domestic and foreign. So you see domestic and foreign grants. You'll also see that it's conducting lobbying activities. So we also see below that is a little bit of how the organization is organized. So we see here is that they have 11 board members and that seven board members are independent, which means that four are not independent.
We're also seeing here that they generate $1.8 million of unrelated business income. So that's pretty substantial number, but they're not January net income or loss from unrelated business activities. They're just generating gross income of 1.8 million. So below that is what people are more familiar with in terms of benchmark analytics, and it's the financial picture broken down into very broad categories of revenue, expenses, and net assets. What do most accountants and numbers people like to see? They like to see comparative information. We love to start to build trends and see in general where an organization is going. Unfortunately, on the 990, this particular section and the balance sheet are the only comparative information.
So another couple more interesting things to point out on this particular slide is that if we look at the financial information, the contribution have drastically decreased, and not only have they drastically decreased, but below that, we see that they're also using a professional fundraiser. So in the year before, they did not use a professional fundraiser and had a significant amount of contributions. So if we think about what that means is that their cost of fundraising just significantly increased. What we also see here is that investment income increased substantially.
So is that unrelated business income related to possibly the investments? Maybe they had a capital campaign in the year before, and they're putting funds into investments. Who knows? Then looking at their expenses, this organization appears to have 60% of their expenses relating to grants going out the door. So for an organization that really is promoting public hugging, I'd be curious of what grants that this particular organization is giving to, and are those grants supporting the mission? Luckily, on the form 990, that information it's also disclosed in a supplemental schedule.
So one of the things that I wanted to point out here just very top again is that this organization does not have a website. So for an organization that's really been in existence since 1999, it's a little odd, especially for an organization that is educating the public and doing some lobbying. You also note that they are incorporated or organized in New York. We're not going to go into really any state rules and regulations, but everyone should know that we're an organization that's organized and operating. Each state is a little bit different. It may have different requirements.
So here, what we see is this is actually page six of the core form 990. Page six is where an organization really starts to detail out a little bit about its governance. So there are two parts to this page six here. We see part A. Part A is broken down basically on how the organization has governed, disclosure of different relationships among board members and employees as well as how the organization is managing fair. So if we start off, we see the voting members between total members and independent members, which we saw on the snapshot. It's the exact same information. If you remember, they had 11 members, and they had seven that were independent. So basically, what that means is that this particular organization is getting closer to having a board that's not able to act independently from possibly their own personal interests.
We'll talk about a little bit more about conflict of interest in part B. So what you also see here is number five. So from an auditor standpoint, from an accountant standpoint, I would look at number five as the juiciest part of this entire form. So number five is, did the organization have a significant diversion of assets? I guarantee you, if that's a yes question, it's going to pique a lot of interest to your readers, you see that. Then speaking of yeses and nos, so this particular section, if you have a yes answer to any question from two to 7B, it requires a written response in section... I'm sorry, Schedule O up, and then anything with a no for numbers eight, nine also require written response. So if you do check that box, yes, on number five, guaranteed, you must have something in Schedule O to describe what the significant diversion of assets was.
Here, we have the second part of page six, part B as part of the organization's policies and disclosures. Let me see here. Just circled on top is that the IRF, even though there's a list of policies and procedures that an organization could follow, the IRS does not require that they do this. But having them obviously is part of best practices and good governance. There are some states that do require some of these policies and procedures. So as a donor using this form, if you were looking to give money to this particular entity you would want to make sure that they are actually doing best practices. As a peer organization, is your organization doing better or worse than this, and are they following the best practice?
If someone was looking from the press and maybe someone felt that there was a significant diversion of assets, does this organization have these policies and procedures? If it doesn't, imagine what the press is going to do to this particular thing? So going through this, there are things you want to be thinking about a critical mind and how an organization is really working. As a donor, you want to trust it. As a peer organization, you want to be better than your peers. As a board member, you really want to be protected. As an organization, you want to continue to fulfill your mission.
So this is the compensation slide, and this is where a lot of people just really go to first, and this is everyone's favorite. So what we see here on this slide is the section where all of the voting board members are listed, all the offices and key employees and all the employees who earn a hundred thousand dollars or more are listed five... I'm sorry, five highest employees earning one hundred thousand or more. It's important to note that those individuals who have reportable compensation above $150,000 are also reported on Schedule J, and that just details a little bit more out of their particular compensation.
One of the interesting things about this particular year for 2019 is that now the IRS is requiring that the list of individuals on this particular form are listed in order of highest compensation to zero compensation. So I can tell you that for people who are a little skittish about having compensation listed, it's going to be the first thing on the page.
Statement of revenues. So here we see that the top portion of the page shows what's relevant among organizations. So peer organizations would focus really on what's here relating to contributions, non-cash revenues. What kind of non-cash revenues are they generating for this particular organization, if it's Hugs. I highly doubt. They should not be recording any non-cash revenues relating to Hugs, but you never know. Maybe they are. Of course, any non-cash contributions would also be disclosed in a supplemental schedule. In this particular section, I don't see the $1.8 million of unrelated business income. So if there were relating to any programs, it would actually be in column C.
So here we see the statement of functional expenses. So this is which an organization takes its natural classifications, which you see there in the number of bullets, and it's broken out between then the functions such as program management and general and fundraising between columns E, C, and D. So many organizations that prepare financial statements in accordance with the US GAAP should already be used to seeing this information broken out in their financial statements. Recently, the US GAAP required that not-for-profit organizations have a statement of functional expense.
So US GAAP actually doesn't dictate how they should do it in the financial statements. So the IRS actually has prescribed a little bit more detail. So one thing to note is that if you're a 501(c)(3) and a (c)(4), you are required to complete these columns, B, C, D. If you are not, if you're an organization such as the 501(c)(6), even though for GAAP financial report purposes, you may have a functional expenses in your financial statements, it will not be required to be presented on the informational return.
So briefly, what kind of information can we get from the functional expenses? The answer really is a ton. The functional expenses show how the organization is spending its resources and fulfilling its mission and whether or not these expenses seem reasonable in relation to the mission. So for instance, if Hugs Inc is spending the remainder of their funds other than their grant expense on alcohol and party supplies, that may not be appropriate. But for Hugs Inc, it may be appropriate.
So there are a lot of different types of ratios that can be conducted on a statement of functional expenses, such as program expenses to total expenses, fundraising expenses to total contributions. It's actually a good metrics to use for peer comparison. So here we see the actual balance sheet. The balance sheet is the second place where comparative information exists that a reader can determine quite a bit of information on the organization's financial statements.
So one thing I just wanted to note is that a person may also apply the same ratios that any commercial organization would have on here. But not-for-profit organizations have a profit motive. So obviously, they have the same type of assets and liabilities. So I could go on and on and on. I know Candice is ready to speak as well. So I'll hand it over to Candice who's going to talk about the rating and stuff.
Candice Meth:Thank you so much, Bill. So we're going to focus in on just two of the watchdog agencies. There are several out there. But probably the one that's most familiar with everyone is Charity Navigator. They'll often give a score from zero to four stars, and it's based on metrics that include financials and then accountability and transparency. They group nonprofits and niches, and they determine what niche you're in. It can be museum, community foundations, public broadcasting and media. Then they handicap the ratings depending on the niche that you're in. Their website is completely free and searchable. So it's often used by donors as well as the media, et cetera.
So they have their top 10 lists. Whenever I hear top 10 list, I always think of this gentlemen. So these are the top 10 lists that come up on their website currently. I think what's important to note is if you had looked at their website a couple of years ago, there were some more controversial topics that showed up right on their webpage. They used to have as a bullet, 10 charities routinely in the red. They used to have another one called 10 charities in deep financial trouble. I think what you see now is a more positive focus and some more interesting groupings of charities rather than just the controversial elements.
So again, important to note that they're doing this, and you as an organization may want to find out if you're on one of these lists and know what the public perception out there is. This is the accesses in which they rate you. As I mentioned, financial score on one axis, accountability and transparency on the other. So they do assign a numerical value, and then that equates to the number of stars you get, with the highest being four stars. It is certainly not easy to achieve a four-star rating. We'll briefly look at some of the metrics that go into that.
So financial performance metrics, they do focus on the program expenses, admin fundraising, the fundraising efficiency, where you're looking at how much was raised versus how much you spent to raise it. But interesting to note, they also focus on working capital ratio, the growth of your programmatic expenses, and then they take a look at liabilities to assets. With respect to program expenses, one of the most common questions that we get as tax preparers and auditors is, how much am I required to spend on program? The truth is there is no authoritative literature coming out of the financial accounting standards board saying that you must spend X% on program, and there's nothing coming out of the IRS that says you must spend X% on program.
Instead, what has emerged is best practices, if you will, really coming out of a reaction to watchdog agencies putting out what they think are the right guidelines. They vary entity to entity. So here you note that Charity Navigator feels if you spend less than one-third of your expenses on program or mission fulfillment, they believe that you are not demonstrating commitment to your program, and therefore, you will not only get a zero points for this particular metric, but you'll get a zero-star rating for financial health in general.
So that's just their interpretation. The reason why bill pointed out page 10, the core form 990, where you see all the detail of expenses is you can take the total program expenses and divide it by total expenses, and that's how they're coming up with this ratio. They then say that if you spend between 33 and a third and 50% you will get zero points for this metric. So you won't sail financial health in total, but they'll still give you zero. So effectively, what they're saying is that they believe you should spend more than 50% of your total expenses on program, i.e., mission fulfillment. Again, the way that they weight their scores, depending on which niche you're in, one of the niches is noted below, which is community foundation.
They do a similar metric for administrative expenses. Things that fall in the administrative bucket are often compliance driven, such as the fees you incur for audit, maybe some legal fees, et cetera. So here, this is for the food banks and humanitarian relief niche, and they show you that if you spend less than 3% of your expenses on admin, you'll get the highest score. Fundraising expenses. Here, these are the community foundation and food bank and humanitarian relief charities who we presume do a lot of fundraising. If you spend less than 5% of total expenses on fundraising, you get the highest score here.
Interesting to note the working capital ratio. So this takes a look at sustainability really, and we talk a lot these days about what is the right amount to keep in reserves, and how do you make sure that you're sustainable? So this particular calculation takes a look at your net assets or working capital that's reported on your most recent 990 and sees how many years you could sustain your spending.
So for museums, if you could continue spending for over three years, you get the highest score. Libraries and historical societies, if you had more than four years of working capital, you get the highest score. There's a lot of discussion about this particular metric because in the COVID era, we all understand how important it is to take a look at sustainability. But at the same time, if you're keeping a lot in reserves, are you demonstrating impact? Are you demonstrating mission fulfillment?
Then the next metric is program growth. So kind of a contradiction to the last one we just took a look at, and this is giving you a rating on the amount you're spending on program and whether or not that's been increasing over the years. So it does a look back at the past three to five years. Based on this analysis, the more expenses paid out related to mission each year, the higher the score. A lot of controversy on this particular metric because there are charities this year, for example, that will have a spike in their expenses because they will have maybe spent a lot to help the COVID situation, maybe personal protection equipment, or dealing with food insecurities. So their spend on program might be higher than an otherwise typical year that doesn't have a pandemic.
Now, that year will flow through this three to five-year look, and they'll kind of have to live up to that benchmark, or their score starts to fall. So when you're trying to keep an eye on both mission fulfillment, as well as sustainability, it may be hard to navigate, what is the right level of expenditures in a given year?
Very important to note, as Bill pointed out, the IRS has no ability to enforce compliance with the governance questions. The idea is to kind of put the question out there and hopefully move everyone into middle in terms of adopting best practices. But these watchdog agencies actually do assign a rating to how you answer those questions. So if you have less than five independent voting board members, meaning if your board members, you have a lot of them that have financial transactions with the nonprofit, then you will get a deduction from your score. If you can't answer yes to some of the governance questions, for example, distributing the 990 to the entire board before it's filed, you will get a deduction of four points. So depending on how you answer those governance questions will impact your score. Now I see we've reached a polling question.
Okay. So I see that the majority of the feedback said all of the above, which is great. So now, we're going to move on and take a look at another watchdog agency, and now we're going to focus on the Better Business Bureau Wise Giving Alliance. The way that they work their system is it's more of a pass, fail type of metric. You either meet the standards, you did not meet the standards, you did not disclose, or they're unable to verify. They don't just focus on the 990. They're also focused on financials as well as even your budgeting process. So they will rate charities where a request has been made. It's not necessarily the charity itself making a request. Donor can call up and make a request as well, and again, completely free and searchable database. So this is their rating system, and you see the different attributes that they're looking for. Again, sort of the pass, fail on top. Either it meets the standards. It does not. Perhaps the review is in progress.
There are 20 standards, and you can flunk a particular standard but based on rationale may still get an overall meet standard. So you don't have to pass all the standards to get an overall meet. I do want to point out that five of their standards do focus on functional expenses. So five of the standards are really focused in on program expenses versus total or fundraising, et cetera.
So here we know that the BBB says that you should spend at least 65% of total expenses on program activities to get a mix from them. So again, Charity Navigator says you must spend something over 50%, and you start to get a numerical rating here because it's pass fail. You have to spend at least 65% to get a pass. With respect to the fundraising, spend no more than 35% of the related contributions on fundraising. So this is to Bill's point of, what does it cost you to raise a dollar? How efficient are you in your fundraising?
This is a very interesting one, has to do with accumulating funds. So the idea here is to avoid accumulating funds that instead could be used for programmatic activities, i.e., mission fulfillment. So this really takes a look at those organizations that have substantial ownership net assets that's more than three times the size of last year's expenses or three times the size of the current year budget.
So for example, organizations that might have a unrestricted board designated fund might encounter that they have a board designated fund that's more than three times the size of the budget, and therefore, they would flunk the standard. So a lot of controversy for this one, especially again, where we're all taking a look at sustainability and obtaining the appropriate level of reserves. It might make sense for an organization to do long-term planning, and therefore, they may have accumulated funds and might not pass the standard. We return next poll-
I find this very interesting. So definitely, the result that I expected, I will point out that GuideStar often says that they are not a watchdog agency, that they merely put the information out there for public consumption. But they don't necessarily test a score to it, per se. But at the same time, it's one of the most frequently used websites to try to do some analysis on charities. With that, I'll turn it over to Mary.
Mary Rizzuti: Thank you, Candice. So the next interesting topic will be around reasonableness of compensation, certainly an area of interest and importance. So I wanted to begin first with looking at the general considerations of compensation. I am not advancing the slides. Not sure why the slides aren't advancing. Okay. General considerations. So who sets executive compensation? Board of directors will set the executive compensation level for the executive directors. Sometimes the board will have a subcommittee of the compensation committee, and they will take the charge on executive director compensation.
For the senior leadership team, the executive director, many times we'll make recommendations to the board of directors or the comp committee. Other times the board of directors are the ones who are setting the compensation for the entire senior leadership team. Another area of interest is really, who is aware of the liability that they have with respect to deciding upon reasonableness of compensation. So there's an excise tax levied on individuals, 10% on the portion of compensation that is considered unreasonable. Another point of focus and attention is remuneration over a million dollars. For the tax reform bill that was passed in 2018 imposes a 21% excise tax on the amount of compensation greater than million dollars paid by a not-for-profit to any of their five highest paid employees. So again, something to pay attention and to note.
Separation pay is also impacted. So if the separation paid to an executive director or one of the top five is equal to or greater than three times the employee's base amount, the organization pays an excise tax of 21% on the amount in excess of the employee's base amount. What's important to note here is that base amount is not base salary. It's the average of earnings for the five prior years. This is a very important distinction to make so that there are no surprises at the end of the reporting period. Again, as mentioned previously, are those who are setting compensation independent?
So if there's a conflict of interest, that individual needs to remove themselves from the determination of compensation for any particular executive director. We had an occurrence where the executive director's personal accountant was determining the part of the board that was determining the compensation of the executive director, currently something that is not a best practice and certainly not allowable.
Data sources are very important and something that can be challenging. So when you're doing your market study, you want to look at your not-for-profit published surveys. The form 990s are great source of information. Then we can also look at for-profit published surveys. So intermediate sanctions allows us to look at for-profit data. So intermediate sanctions are applicable to 501(c)(3) and (4) organizations. It imposes this excise tax on disqualified persons and management.
So how do we define disqualified persons? Any person that has the ability to have a substantial influence over an organization as a disqualified person. Also, organization managers, if you will, could be officers, directors, trustees, or anyone who had authority or responsibility similar to the officers within the organization and had influence over the reasonableness of compensation. So what is reasonable compensation? It's the fair market value paid for like services by a like enterprise under like circumstances. It covers all forms of compensation.
The rub here is like enterprise, like circumstances, like services. So this is where compensation becomes an art and a science. So the data is going to provide us with our foundation, but the applicability of that data is very important as well. We'll discuss that later on in the presentation. The excess benefit transaction is the value that is excessive beyond what the market bears for a particular individual. The intermediate sanctions, regulations establishes a procedure that will provide a rebuttable presumption for reasonableness of compensation, and it covers whether or not there was a conflict of interest among the individuals who prove the compensation, whether there was appropriate data used in making those decisions, and whether the decisions were adequately documented in a timely fashion.
So this is a great best practice, not only for 501(c)(3)s and 4s, but for all not-for-profit organizations. The form 990 off Schedule J gives us a nice framework and a hint as to what exactly the best practice is with respect to setting compensation. So on item three, they set forth six different check boxes to mark. Was it determined by a compensation committee, an independent compensation consultant? User from 990s of comparative organization, employment contract, comp survey and board or comp committee.
So again, no secret about what they're looking for with respect to setting compensation. Before we go into the data part, let's focus attention on the penalty for not setting compensation in the appropriate manner. So there's an excess benefit penalty of 25% of the excess benefit, and if it's not corrected within the taxable period, the individual has to pay an additional 200% tax on the excess benefit. With respect to individuals who were responsible for approving the compensation or had knowledge of the excess benefit transaction, it's 10% of the excess benefit up to $20,000. But it's per occurrence. So if there's a look back of three or four years, it's 10% for each occurrence.
So we're going to look at market value. What exactly is that? So we're looking at the position, the skills, ability, qualification, nature, extensive scope of the position. We're taking the incumbent out of it right now. Example would be, we have an executive director of sports association that has a PhD in political science. That PhD in political science has no bearing on the way in which the individual executes his or her position. So we don't take that as any kind of attribute that needs to be evaluated.
Size and complexity of the not-for-profit organization is extremely important, geographic location, mission, and the financial position of the organization. So market value study is useful, but we always want to make sure that we're protecting the organization. If the organization doesn't have the ability to pay a certain level of compensation, that's where your compensation philosophy comes in and where are you going to start to, again, utilize the data as a foundation, but making sure that it matches and aligns to the organization. So you'll look at your comparable organizations, but make it work for your particular organization.
Very interesting results. So it varied across respondents. Every three years was the leader, with every year coming in second, and never conducted a compensation study is about quarter of the respondents. So again, best practices, every three years with a refresh every year. So I'm happy to say that there's a lot of best practice going on in the participants here.
So the next part is methodology. So what exactly does the methodology look like? So the rebuttable presumption references appropriate data, what exactly is appropriate data? So we're going to look at comparability of organization, and that is defined within the NCE code of the organization. So are you so social services? Are you arts and culture, health care? Also, the revenue size of the organization is a driver of the compensation. We like to utilize half to two times the revenue of the target organization and then similar mission and services.
I also like to consider the source of revenue. So if the revenue is coming mostly from program service revenue, the way in which an executive director's scope of position may be a little bit different than an organization that depends mostly on grants and contributions. Do I feel that that's an important metric to examine when you're doing your reasonableness study? Then we want to match to job content. So publish surveys give us a snapshot of the job content of positions. Form 990 really are about title. So we try to do a little bit of additional research, like going on the website and learning more about the background and bios of the executive directors that are included in our market studies to make sure that the fit is appropriate.
We typically use GuideStar to consult our research. May provide a screen of different parameters that you can choose with respect to NCE category, geography, size. Again, the second tier is the mission and the sources of revenue. The third tier, which I like to layer into my research is the executive structure of an organization. This is important. If an organization has a very flat organizational executive structure, that may impact how the executive director is compensated as against whether there's a stronger team from a senior leadership perspective. So I'd like to take a look at that as well.
This is a snapshot that Bill shared previously, and this is where you would glean your information as to where the organization gets its revenue with respect to grants, program, service, revenue, and investment revenue. Again, this is another look at the form 990 part 7. What I'm very interested in is the schedule J, which is the breakdown of the compensation. This is good for market value. But it's also great for prevalence. So if I want to see if my peer group is beginning to develop bonus programs within their organization, this is going to provide me with that information. Same with deferred comp.
So we utilize this both for market value and prevalence. When we choose our published surveys, we again want to make sure that they are aligned to what we are analyzing from a target perspective. So empirical data, we don't want to go to Glassdoor. We don't want to use job postings for this type of analysis. We want to look at the proper sector, geography, and size. Now, there are some surveys that are targeted only for not-for-profit organizations. There are other surveys that have a cut for not-for-profit organizations. There are surveys that report on geography and sector. So we like to cast a wide net on all of the data that we collect in order to make sure that we have as much of a data set as possible in order to do our weightings, which I'll discuss next.
Intermediate sanctions also allows us to look at for-profit data. So if there's an exchange of talent within the for-profit sector, we want to know what that level of comp is, and we may not rely heavily on it, but I think being informed with respect to what you're competing against and where you may be pulling talent from is very important. We can also look at published surveys within the for-profit arena and proxy data. So for instance, if you have a not-for-profit in the tech space, you may want to do a small proxy analysis in the for-profit sector in the tech space to see what is the level of compensation there.
Now, the applicability of your findings is really where the rubber meets the road. So we do central tendency calculations. We age out data to a common date, and we weighed out data sets. We're going to weight the not-for-profit data much more heavily than the for-profit data. If in fact, we're using for-profit data, and that's where we'll do our central tendency calculations to come up with a market consensus.
Now, we're going to compare the findings to the incumbent's compensation. We'll look at each component of the compensation package because if a total cash comp number is 250 K without a bonus, the base salary of that compensation package is going to be greater than base salary of a compensation package that has base and bonus for their total cash comp. So it's important to look at each component.
Also important is to develop a range around your findings. So typically, it's also minus 20%, or many times we'll pull 25th percentile, 50th percentile, and 75th percentile data. Now, I have a nice wide range around which to work. So I'm not going for a targeted number, but rather a range that will align with where my organization fits with respect to financial, talent, incumbents.
Once we have the applicability of our findings, we now want to document the methodology and the decisions that were made around the methodology because we want to have a safe harbor if in fact there are questions around executive compensation. So why benchmarking is important, because we're making informed decisions. So both from a recruiting and a retention perspective, it's important to know what the market there is. But most importantly, for not-for-profit organizations, optics are important, and how we present to the community is very important. So we want to have a very deliberate process and what our total rewards philosophy is.
So is the compensation competitive, and is there a justification for the market positioning? So there are some organizations that will take the position that they want to pay at the 75th percentile. There needs to be thoughtful consideration around that, and again, documentation around why that makes sense.
Bonus development, design, and assessment is extremely important. We want to make sure there are no private inurement concerns. So a bonus award should never translate into a dollar of revenue that's earned for the organization, translates into a dollar of bonus award for the executive director. So we like to look at thresholds and other performance metrics and completely steer clear about a revenue dollar in equals a bonus dollar out.
Key areas for board consideration is the failure to acquire sufficient information. So we want to make sure again that we're casting a wide net and we're not cherry picking what organizations we're choosing to include in our peer group in order to come to a decision that we have preconceived with respect to compensation. Then we want to, again, sure that we have an absence of a conflict of interest. We want an arm's length transaction when it comes to compensation. So I think you wanted to talk about other areas where benchmarking is important.
Bill Epstein:I did. Thank you, Mary. There are some other common examples here of how benchmarking can be used other than compensation. So here, we see some different examples here. Investment, it's in investment returns. Larger organizations with significant portfolios may want to look at their peer organizations to look at investment return, investment mix, and investment management fees to ensure that they're doing the best they can. Other one is technology spending. How much money are we as an organization spending on technology compared to our peer organizations? Are we spending too much, too little? Are we keeping up to the pace?
Another frequently asked question is relating to tuition revenue versus financial aid given out in comparison to maybe other private schools or other schools that give out financial aid to their students. Consulting fees, you get that a lot relating to whether or not a particular professional service vendor is quoting on a particular organization and how that particular vendor compares to other organizations that they serve and whether or not the key organization is spending more or less on the same service.Then another one, and finally, just relating to endowment, a lot of organizations look at peer organizations relating to their endowments and whether or not they are having similar returns on investments relating to their endowment and whether or not they're actually spending on their endowments, relating to how their peer group function. Mary, I will hand it back to you.
Mary Rizzuti:Thank you. So benchmarking is important as a guide, a framework, and a foundation. But certainly one size does not fit all. What's important is to be able to get in front of whether an organization is falling outside of the norm or a set ratio, find out why that is, see if there's corrective action that needs to be taken, and make sure that there's, again, documentation and communication around them, the disparity that may exist. Application of data is extremely important. So when we start to look at the incumbent with respect to compensation, we want to look at skills, ability, impact on the organization and really make sure that what we have makes sense for the organization. There's nothing that's less valuable in a market study than simply gathering data and not aligning it to the organization.
The 990 is extremely important and a valuable tool to tell the story of an organization. There were some limitations when we're looking at some metrics because there's a lag in the posting of form 990s, particularly in GuideStar, which is what we utilize most often. I think the lag is going to increase because the filing for this year has been pushed back to July 15th. But again, when you're doing your comp analysis, you want to make sure to age the data to a common date so that we account for the lag.
Limitations with respect to what positions are reported. A lot of information around program managers is many times requested, and that's where the published survey data becomes extremely important because they're not often reported in the form 990. So if we go back to our polling question, where individuals are conducting market studies on an annual basis, EisnerAmper is actually beta testing an IP platform that will allow an annual update of your compensation study. So once you do your comprehensive market study, we're working on a way in which to update that information on an annual basis. So stay tuned on the progress on that, but it's definitely in the works.So the results are interesting. Again, I think that the information has validated methodology among our audience. But I'm happy to see that they'll be some new initiatives with respect to benchmarking and making changes in the process. So I thank you for your attention, and I think Candice is going to wrap it up for us.
Candice Meth:So I'm so excited that we are going to be rolling out our benchmarking subscription service. The idea is that we want to know what is valuable information to you. So as bill mentioned, not only with respect to compensation, but also things like technology spend or investment management fees, we'll have a searchable database that will be both national, or you can delineate it by geographic location, and you can take a look at what peer organizations are spending on that particular expense line item. So we want to hear from you. If there's a particular expense that you'd love to see us layer into our new software, we're excited to do that, and we're excited to offer it to our clients.
We do want to note that while watchdog agencies provide ratings based on data extracted from the 990, the criteria of agency by agency certainly varies and can definitely lead to different conclusions. Benchmarking compensation for executives is a necessary initiative and should be considered each year. We did get a question in terms of, how often should you an executive market study, and we really recommend that you do this on an annual basis. Form 990s are a great source of information, should also consider published survey data because it gives you a more robust data set.
Certainly evaluating compensation within the for-profit sector can be very useful. We know that there are, for example, nonprofit hospitals, but also private hospitals. But the job requirements for the head of the hospital may be very similar. Therefore, contemplating the compensation in the private sector might be a valuable data set.
You want to identify a strong comparable peer group that provides a solid foundation for analysis, and certainly documenting the process for compensation decisions is key. I do want to point out that what we didn't touch on today that much, it's the 4960 tax, that's that tax for compensation, excess a million dollars. You might have heard that the IRS has just put out new guidelines. We are in the midst of releasing a blog that discusses the changes, and we will be doing a deep dive webinar on that topic. So that is forthcoming. Please stay tuned for that.
We also just want to touch on the fact that, for example, things like spending on IT might be higher at this particular point in time, as so many nonprofits are trying to work remotely or trying to move data into the cloud. So that might be a very interesting light item to keep your eye on. What people are spending today versus what we see they will be spending next year as we all try to work from home and remain sustainable. We really do encourage you to write in comments. Please let us know if you'd like a particular line item analyzed across the nation and that you think would make for an interesting comparison to your peer organization.
With that I think we had one other question. Oh, no. We've got a couple of questions. So we did get a question about the administrative expenses, and the particular slide that talked about 3% seems low. I think that's a great question. There is something called the overhead myth, where it used to be a stigma, if you had anything except program expenses. That's no longer the case. I think that all the watchdog agencies have recognized that administrative and fundraising expenses are inherent to the success of a nonprofit, and therefore, those expenses should exist on an annual basis.
As to what the right level of administrative expenses or fundraising expenses are, it's going to vary organization to organization. That's why it's important to note that there is no one size fits all when you're doing this analysis. We have reached the three o'clock Mark. We did it. A couple of more questions. We will be responding to everyone offline for the questions that we weren't able to answer today. I want to thank everyone for joining us, and we look forward to joining you in the next webinar.